Safaricom gets reprieve in review of competition laws

The team of consultants that the government hired to review telecoms sector competition rules has knocked off or removed the sting from a number of clauses, lifting the regulatory cloud they cast over the market leader Safaricom.

Frontier Economics, a UK consultancy that Information minister Samuel Poghisio hired in June in wake of Safaricom’s vigorous opposition to the new regulations, found key aspects of the gazetted rules to be out of tune with international best practices and has recommended that they be revised or struck out altogether.

Safaricom had identified a number clauses it said were unfairly targeted at its business and threatened to seek legal redress if the government failed to repeal them.

The rules aimed to level the competitive landscape for telecoms operators and to prevent the service providers from using cross-network tariffs to lock in and exploit consumers.

Safaricom will particularly find relief in the fact that the consultants have recommended a more rigorous definition of market dominance and want regulatory action reserved for abuse of market dominance, a key issue that the telecoms firm raised when the rules were published in May.

“The critical issue to consider is whether Safaricom or indeed any other entity that is perceived to be dominant in a particular market can overtly act independently of both its competitors and consumers by increasing retail consumer prices and erecting barriers to entry for new players,” said Mr Michael Joseph, the Safaricom chief executive.

The consultants have recommended that the rules be refined to read exactly as Mr Joseph had wanted.

Documents seen by the Business Daily also indicate that the consultants have struck off the fair competition rulebook the definition of dominance as a player with more than 25 per cent of total revenues in a particular market segment saying that threshold is low in view of best practice.

The European Commission’s telecom sector competition rules that the consultants heavily borrowed from have set control of between 40 and 50 per cent of total revenues as the threshold above which a player is declared dominant.

This means that a service provider such as Safaricom will not be declared dominant just because it has significant market power, but also on account of other factors, such as possible barriers to market entry for potential competitors, and barriers to existing competitors expanding in the market.

Burden of proof

Safaricom controls 78 per cent of the market followed by Zain Kenya with 10.4 per cent while Essar and Telkom Kenya have 6.4 per cent and 5.2 per cent respectively.

Though these numbers would still leave Safaricom as a dominant player, the telecoms giant will find solace in the fact that the consultants have put a heavy burden of proof on the regulator in the event that it intends to act against a dominant player.

It will, for instance, be required to notify the affected service providers, and demonstrate that there has been an abuse of the dominant position in a specific market segment or a strong likelihood that the abuse will occur.

In the event that the action it intends to take is meant to forestall a looming abuse of market dominance, the CCK will have to meet more than five stringent regulatory requirements.

It will have to demonstrate that effective competition cannot develop among existing players and that there exists strong and permanent barriers to entry in the identified market segment.

CCK will also have to prove that the existing competition law is not sufficient to deal with the potential abuse and that proper management of wholesale prices cannot stop the abuse.

These requirements effectively address Safaricom’s earlier concerns that the regulations do not provide for a mandatory process that the regulator must follow before declaring a player dominant in a specific market segment leaving room for arbitrary action.

Legal experts said it will be nearly impossible for the CCK to meet the set requirements within the time set making the possibility of such action remote.

Safaricom will be most relieved by the fact that the consultants have proposed a repeal to 30 days of the clause that requires a provider of regulated services (dominant player) to publish intended tariff changes at least 90 days before the rollout.

“Ninety days is much longer than what is ordinarily applied in other jurisdictions,” the consultants say in a report submitted to Mr Poghisio.

“We recommend a period no longer than 30 days.”

The CCK has also lost the power to set tariffs in cases where they are not satisfied with a dominant player’s application to adjust tariffs.

It will only retain the power to advise the operator to make readjustments on the proposed tariff without being specific.

Strong opposition

Safaricom had put up a strong opposition to these clauses arguing that they amounted to introducing price controls in the mobile telecoms market besides exposing it to the danger of being upstaged by rivals.

Waiting for 90 days meant that any rival who got wind of the intended price adjustment but whose services are not regulated under the market dominance rules could introduce such prices in the market and reap the benefits while the big player awaits the CCK’s approval.

The consultants also argue that publishing price reductions for regulated services may reduce the ability of affected operators to compete effectively and have recommended that the obligation be restricted to intended price increases.

Safaricom has also been vindicated in its opposition to the requirement that telecoms operators maintain separate books of account for each service and be barred from subsidising the prices of any service it offers in the market with revenue from other segments of the business.

Frontier Economics says not all cross-subsidies are unfair and having such a clause could also limit the ability of operators to offer geographically averaged pricing, or averaged pricing across different consumer groups.

New customers

The consultants say that in many jurisdictions where the mobile market is competitive, operators offer handset subsidies to attract new customers and support the subsidy with profits made from other mobile services.

“The regulation should not, therefore, prevent operators from engaging in any cross-subsidies but refer to anti-competitive cross-subsidies only.”

The government hired the consultants in June to look into the regulations after Safaricom mounted pressure on the government to have them reviewed, saying they risked reversing the gains the company has made over the years.

The regulations were, however, positively received by Safaricom’s rivals Zain Kenya, Telkom Kenya and Essar, who saw them as levelling the playing field and enhancing competition.

All the five regulations, including the two contentious ones are currently in force and the move by the government to amend them means that the Ministry of Information will have forward to changes to the State Law office to be gazetted.